Escalating US-Iran tensions have driven crude prices sharply higher, breaking through the $100 per barrel mark and maintaining strength thereafter. However, the oil sector has shown divergence, declining for three consecutive trading days as the price-driven momentum appears to be fading. According to informed sources, the US-Iran conflict has persisted for over half a year since late February, cycling through phases of confrontation, escalation, de-escalation talks, and renewed hostilities, effectively bringing the Strait of Hormuz—the world's critical energy transit artery—to a standstill.

Crude prices, buffeted by these geopolitical swings, began climbing in the third quarter after significant volatility, surging to near $110 per barrel on September 10th and subsequently holding above $105, revisiting recent highs. In response to oil price movements, most A-share oil companies staged rebounds in Q3, though gains lagged far behind the rise in crude itself. Hong Kong-listed oil majors performed relatively strongly, recouping over 80% of earlier losses. Notably, PetroChina (00857) rose 21% in Q3, erasing its Q2 decline. It's worth mentioning that following the sharp spike in crude on September 10th, oil sector stocks fell instead of rising, closing in negative territory for three straight sessions. Yet, with no signs of a near-term ceasefire in the US-Iran conflict, escalating hostilities are fueling expectations of further oil price increases, keeping the sector active. So, do the Big Three oil companies still present opportunities?

Big Three Oil Giants Rake in Profits; CNOOC's Net Margin Hits 35.36%

Crude oil asset prices surged 75% in 2026, outperforming most major asset classes. On a quarterly basis, crude prices rose 70%, fell 29%, and gained 46% in Q1, Q2, and Q3 respectively. Although Q2 saw a price decline, year-over-year levels remained elevated. As the domestic crude oil heavyweights, the Big Three—CNOOC (00883), PetroChina, and Sinopec (00386)—have reaped substantial profits.

In the first half of 2026, all three achieved growth in both revenue and profit. CNOOC led the pack with increases of 16.88% and 23.42% respectively, boasting net profit margins and return on equity of 35.36% and 20.05%, far exceeding PetroChina and Sinopec. CNOOC's core business is crude oil exploration and production, contributing 86.78% of H1 revenue. Net production reached 399 million barrels of oil equivalent, up 3.7% year-over-year, achieving both volume and price gains, with net profit attributable to shareholders hitting RMB 85.818 billion.

PetroChina, the leader in crude assets, produced 921 million barrels of oil equivalent in H1, down 0.3%, with crude output at 463 million barrels, a 2.8% decline. Despite this, its massive scale coupled with surging crude prices made it one of the biggest beneficiaries, posting net profit of RMB 103.936 billion. Sinopec, with a more diversified revenue stream, is less impacted by crude price fluctuations. Its H1 oil and gas equivalent production was 263 million barrels, significantly lower than PetroChina and CNOOC. Moreover, declining revenue from gasoline and diesel products weighed on overall performance, with net profit at RMB 26.567 billion.

Given the over 45% surge in crude prices during Q3 2026, the Big Three are highly likely to sustain revenue and profit growth. Based on average quarterly profit levels, PetroChina and CNOOC are projected to see net profits exceeding RMB 155.9 billion and RMB 128.7 billion respectively in the first three quarters, surpassing their full-year results from last year. It's not just Chinese firms—US giants Chevron and ExxonMobil have also posted higher profits, with ExxonMobil's Q2 profit more than doubling. This explains why former President Trump expressed dismay, criticizing oil companies for excessive earnings and attempting to talk down prices.

It's important to note that while a strong Q3 earnings performance is a certainty, the question remains whether crude prices can continue their upward trajectory from current highs and whether Q4 holds further appreciation potential. This will determine the sustainability of the Big Three's investment value.

Three Key Drivers; CNOOC May Garner the Most Market Favor

The fundamental logic behind this crude rally is that geopolitical conflict escalation has disrupted the supply-demand balance. Three key variables support the sustainability of the uptrend. First, ongoing transport disruptions from military escalation prevent effective supply replenishment. The US-Iran conflict has halted shipping through the Strait of Hormuz, while Houthi attacks on Saudi Arabia threaten to block the Bab el-Mandeb Strait. Alternative routes must navigate around the Cape of Good Hope, significantly raising transportation costs, which are inevitably passed on through higher oil prices.

Second, supply is continuously contracting. Middle Eastern production capacity is unstable due to conflict zones, Russia is prioritizing domestic needs amid the Ukraine war, and the US, a key supplier, has seen inventories drop to historic lows. Third, demand-side countries heavily reliant on Middle East supplies, particularly Japan and South Korea, are stockpiling oil to ensure industrial stability, while producers' strategic restraint on supply further tightens the market and drives prices up.

These three variables collectively support a medium-to-long-term upward trend in oil prices. Goldman Sachs' latest research indicates that if attacks on shipping in the Strait of Hormuz and the Red Sea intensify further, Persian Gulf average output in 2027 could be 4 million barrels per day below pre-conflict levels (versus 500,000 bpd in the base case), potentially pushing Brent crude above $120 per barrel. Conversely, should regional tensions ease and Middle East supply adaptively recover, crude might consolidate at elevated levels around $80 per barrel.

Clearly, benefiting from rising crude prices, the Big Three's profit cycle extends beyond this year, with earnings performance set to drive valuation upgrades. Currently, based on PE (TTM), PetroChina, Sinopec, and CNOOC trade at 9 times, 14.1 times, and 7.3 times respectively. CNOOC stands out with smaller revenue but exceptional profitability and the lowest valuation, while Sinopec, despite larger revenue, trails in market cap with weaker profitability, resulting in the highest PE.

Investment banks see opportunities across all three. For instance, CLSA rates all three H-shares as "Outperform," with target prices of HK$12 for PetroChina, HK$4.9 for Sinopec, and HK$32 for CNOOC. Goldman Sachs has raised its targets across the board: PetroChina from HK$8.6 to HK$11.5, CNOOC from HK$21.1 to HK$31, and Sinopec from HK$3.6 to HK$4.9. Both banks' targets imply upside of over 20%, 4%, and 30% respectively from current prices.

Notably, CNOOC's strong profitability has made it a particular favorite among investment banks. Beyond the aforementioned, BOC International and CITIC CLSA have set target prices of HK$34.69 and HK$36 for CNOOC, representing premiums of over 40% to its current share price. Additionally, CNOOC offers a dividend yield exceeding 5.4%, among the highest in its peer group.

In summary, the surge in crude prices this year has filled the coffers of the Big Three. CNOOC, with its unmatched profit margins and shareholder returns, leads the field. With crude continuing to climb in Q3, it is expected to deliver impressive quarterly profits. Given that the US-Iran conflict is unlikely to conclude in the near term, though "tension and de-escalation" phases will cause price fluctuations, the three key drivers point to a medium-to-long-term upward trend in prices. This extended rally cycle presents long-term opportunities for the Big Three. Among them, CNOOC, with its superior profitability, low valuation, and the highest target price premiums from investment banks, stands to benefit most from this price upcycle and warrants close attention.